Obama’s Flunking Economy: The Real Cause

Lawrence Summers, then director of the National Economic Council, and Treasury Secretary Timothy Geithner, Washington, D.C., December 2010

Ron Suskind’s Confidence Men is not a calm first draft of history. It is not an impartial or unbiased look at the Obama administration’s first two years. Rather, it is an investigation. The crime is homicide, and the victim is the promise of Barack Obama’s presidency. But this isn’t a suspenseful whodunit. Suskind tips his hand in the first pages.

He’s describing the press conference in September 2010 where President Obama announced that Elizabeth Warren would help set up the Consumer Financial Protection Bureau. Warren is one of Suskind’s heroes. She’s introduced as “the nation’s town crier” and “a leading voice for tough, restorative reforms.” The mystery of the initial chapter is why Obama seems to be holding her at arm’s length.

It’s quickly solved. The villain of this vignette—and one of the key villains of the rest of the book—is “the boyish man in the too-long jacket at Obama’s right hip, bunched cuffs around his shoes, looking more than anything like a teenager who just grabbed a suit out of his dad’s closet.” So who is this man-child who can’t find a properly sized suit to wear to the Rose Garden? Who couldn’t take the time to get his pants hemmed before stepping in front of the cameras? “That’s Treasury secretary Tim Geithner,” Suskind says, “looking sheepish.”

That “looking sheepish” is a common Suskind trick. His book doesn’t just have good guys and bad guys. It has good guys who look like good guys, and bad guys who squirm beneath the weight of their badness. You’re never left to wonder long over which is which. Of Larry Summers, Obama’s first director of the National Economic Council, Suskind says that his personality “recalls that of Nixon and Henry Kissinger, or, more recently, Dick Cheney.” As for Rahm Emanuel, Obama’s first chief of staff, he’s “all impulse and action, with very modest organizational skills.”

By contrast Peter Orszag, Obama’s first budget director, “could think in numbers, talk in full sentences, and work nonstop.” Former Senate Majority Leader Tom Daschle’s comments are “counterintuitive, but incisive.” Financial regulator “Gary Gensler fell into one of those discrete categories of people who create lasting change in Washington’s marketplace of ideas.” When Treasury economist Alan Krueger passes around a pack of slides, each is “a chart of blazing, graphed insight.” Suskind offers little evidence for these descriptions. The book does not explain which of Gensler’s ideas will be current in thirty years. Suskind’s approach asks, rather, that we trust his assessments.

I prefer to verify. So I went back to the tape. I rewatched the September 2010 press conference where Obama introduced Warren to the country. I paid special attention to Geithner. Suskind’s right: his suit is too big. But he doesn’t look sheepish or ashamed. He looks, by turns, bored and interested. He clasps his hands behind his back. He nods attentively. He tries not to fidget. He looks like every experienced bureaucrat looks when they’re asked to stand like a prop near the president. Blank, and trying not to make any news. He failed.

I mentioned this was a murder mystery, so I won’t leave you in suspense about the perpetrator: Suskind’s investigation leads him right to Obama’s senior staff, who he believes took advantage of the young president’s inexperience and led a refreshingly unconventional candidate into a depressingly conventional presidency.

Suskind’s story goes something like this: in 2008, Obama was presented with an economic crisis of astonishing severity and complexity. In the beginning, he showed himself to be unexpectedly prepared to deal with it, both intellectually and temperamentally. His self-assurance and personal magnetism attracted a variety of impressive and able advisers, including former Federal Reserve Chairman Paul Volcker, billionaire investor Warren Buffett, UBS America chief Robert Wolf, former Labor Secretary Robert Reich, and former SEC Chairman William Donaldson.

But as “the severity of the crisis bore down on him,” Obama found himself leaning toward a different sort of adviser—safer, more predictable. He wanted people who knew Washington, and knew how to get things done. The “bold visions of the campaign season had meanwhile resolved into the serious, often risk-averse business of actually governing,” writes Suskind. “In the midst of a battering economic storm, it no longer seemed like the right time to be making waves.”

And no single adviser better encapsulates Suskind’s criticisms, and the contradictions in his argument, than Larry Summers. Even more than Geithner, Summers is the villain of the book. Suskind describes him as “brilliant at cultivating the sense of control, even as events spun far beyond what could be managed with any certainty.” He calls that talent “an illusionist’s trick calling for a certain true genius.”

It’s that trick that gives the book its title. Merriam-Webster defines a “confidence man” as “a swindler who exploits the confidence of his victim.” Suskind’s definition is more subtle. “Confidence is the public face of competence,” Suskind writes. “Separating the two—gaining the trust without earning it—is the age-old work of confidence men.” To Suskind, Summers was the ultimate confidence man, and Obama the ultimate mark. Summers offered what Obama wanted—certainty—and Obama was just terrified enough to take it. But the certainties Summers offered were not, in Suskind’s view, the certainties the moment required.

The work that went into Confidence Men cannot be denied. Suskind conducted hundreds of interviews. He spoke to almost every member of the Obama administration, including the President. He takes you inside Gensler’s home and into the Oval Office. He heads to Wall Street and back. He quotes memos no one else has published. He gives you scenes that no one else has managed to capture. The book is valuable for these contributions alone. But Suskind’s reporting seems, at times, to contradict his thesis.

It is not enough, of course, to say that Summers’s personality is reminiscent of Richard Nixon’s, or that “people think he knows more than he does.” What Suskind needs to prove is that Summers, as director of the National Economic Council, gave Obama bad advice. After all, if every dark intimation about Summers’s capture of the President is true, but Summers used his influence to steer Obama toward better ideas, we should be applauding him.

Suskind ultimately identifies two opportunities when Obama could have made decisions that might have substantially affected today’s economy. The first was in the debate over bank nationalization. The second was in the debate over whether to propose further rounds of stimulus. In both cases, Suskind clearly wishes the Obama administration had pushed harder, demanded more, been less respectful of the status quo. In both cases, Suskind’s own reporting shows that Summers agreed with him. And in both cases, Summers—the same Summers who was said to be able to convince anyone of anything, who had Obama’s ear, who allegedly controlled the economic process—lost the fight. But Suskind never resolves, or even addresses, the difficulty that poses for his thesis.

Suskind’s most explosive reporting comes in his recounting of the debate over nationalizing Citigroup. He alleges that the President directed Geithner to develop a plan to take over the failing bank and Geithner simply ignored the President’s order. Geithner and the White House deny this, of course. But this moment is central to Suskind’s story. In his conclusion, he says a successful nationalization of Citigroup would been the moment when “the American people would see that ‘government could do this right,’” and it would have killed off the fear “that if another financial institution failed, it would spark a financial crisis similar to what happened after Lehman.”

Summers, contrary to what you might gather from Suskind’s description, was in favor of nationalizing Citigroup, and he fought for it. Suskind reports that Summers ran interference for Christina Romer, head of the Council of the Economic Advisers, when she made the President aware that Geithner wasn’t developing a plan to take over the bank. He also reports that Summers personally “worked the phones in early March to try to gather the information” needed to produce the takeover plan that Treasury was refusing to provide.

Similarly, in what is perhaps the second-most-explosive portion of Suskind’s book, Suskind recounts a White House meeting in which Romer tried to persuade the President to pursue a second round of stimulus. In a reply that Suskind uses to establish the President’s rough treatment of female staffers, Obama harshly dismisses her. In the next passage, however, Suskind reports on a subsequent meeting when “Summers stepped up, offering, almost word for word, the position Romer had voiced previously.”

So if Summers was really the Svengali Suskind presents him as, if he really had such mastery over the President and the policymaking process, Citigroup would have been nationalized and the administration would have been more aggressive in its pursuit of more stimulus. Neither happened. If you take Suskind’s policy preferences seriously, the implication is that Summers wasn’t persuasive enough to save Obama’s presidency.

That incoherence speaks to the weakness of Suskind’s book, which is also a weakness that afflicts much punditry about the presidency: it is very surefooted in its reporting on personalities and the process by which decisions were made, and very vague when it comes to assessing the policy that was under consideration and judging whether the final approach performed better or worse than the alternative proposals.

The President’s poll numbers aren’t the mystery Suskind presents them as. If you want to know what killed Obamaism, the answer is the stagnant economy. No president, no matter how politically graceful or personally confident, looks good in the midst of an economic crisis. When unemployment rose during the 1980–1981 recession, President Ronald Reagan’s approval ratings fell below 40 percent and his party lost twenty-six House seats in the midterm election. When Franklin Delano Roosevelt and the Federal Reserve twisted toward austerity too early and sparked the 1937 recession, Democrats lost more than seventy seats the following year. No one would accuse either president of insufficient charisma or weak leadership. Americans don’t want leaders so much as they want jobs. And that’s Obama’s problem now, too.

The great counterfactual of Suskind’s book is “What if Obama had chosen a different team of advisers?” But by the end of his book, the counterfactual was coming true. Emanuel was out. Summers, too. Romer had left, and so had Orszag. Even David Axelrod, Obama’s longtime political adviser, was decamping back to Chicago. Only Geithner remains.

In his conclusion, Suskind seems appreciative of the replacements Obama chose. “Following the midterms,” reports Suskind, “the president seemed to be assembling the team he’d originally wanted.” He quotes an anonymous Obama adviser who says, “Rahm and Larry especially, but others on senior staff as well, didn’t have a strong appreciation of what got [Obama] elected, the power of it and how to harness it.” He says that the housecleaning left Obama looking “oddly liberated.”

That was almost a year ago. Today, President Obama’s poll numbers are weaker than ever. The political betting markets give him a less than 50 percent chance of being reelected in 2012. Why? It’s that unemployment is stuck above 9 percent. It’s that a double-dip recession is a real possibility. It’s that the market seems to dive on most days that end in “y.”

Obama’s fortunes won’t rebound until the economy rebounds. And so any account of what he has done wrong, or what he could do right, needs to provide, first and foremost, a persuasive case of how the White House could have done more to promote an economic recovery over the last three years, or could do more to accelerate one now.

That account, however, doesn’t make for as satisfying a story. It’s not about heroes and villains, or dramatic meetings and angry confrontations. It’s about tough tradeoffs between what was politically possible, operationally plausible, and substantively wise. It is about whether more stimulus could have passed Congress or a different chairman of the Federal Reserve would have unleashed more effective monetary policy. And it’s much more about the collision of America’s political and economic institutions than the collision of particular personalities.

Suskind’s narrative takes place in the White House. But the economic response really took place elsewhere. Almost anything the White House wanted to do that would cost money had to be authorized by Congress. Tax cuts? State and local aid? Infrastructure spending? Nationalizing the banks? Congress. Giving bankruptcy judges the power to write down mortgage principal? Direct-employment programs? German-style work-sharing programs? In each case, Congress.

And that was what the discussions in the White House were really about. Congress. Suskind doesn’t dwell on this fact, but his reporting backs it up. The idea to nationalize Citigroup came up as a sort of consolation policy after the idea to nationalize the entire banking system was killed by Emanuel.

“Everyone shut the fuck up,” Suskind quotes the profane chief of staff as saying. “Let me be clear—taking down the banking system in a program that could cost $700 billion is a fantasy. With all the money that already went to TARP, no one is getting that kind of money through Congress.”

The same goes for stimulus. When Obama angrily dismisses Romer’s umpteenth argument for more stimulus, it’s not because he disagrees. It’s because he can’t get it passed. “Enough!” Suskind quotes him as shouting. “I said it before, I’ll say it again. It’s not going to happen. We can’t go back to Congress again. We just can’t!”

The truth of the matter is this: every member of the White House’s economic and political team was closer to every other member than any of them were to the swing votes in the Senate. Tim Geithner and Christina Romer have their differences, but they’re mostly talking the same language. Put them in a room with Senators Ben Nelson, Scott Brown, and Susan Collins—all of whom would have rejected a strong new stimulus—and they may as well be Martians.

It is easy to tell the story of what the White House did wrong in its response to the financial crisis: it underestimated it. It had good reason to underestimate it, of course. Almost everyone was underestimating it. In the fourth quarter of 2008, when Obama’s economic team was meeting in Chicago to map out their policies, the Bureau of Economic Accounts thought the economy was contracting at a rate of 3.8 percent per year. It wouldn’t be until this year that we learned the economy was really contracting at a rate of 9 percent. And it wasn’t just the BEA. The Federal Reserve has been continuously overoptimistic. So have the leading private forecasting firms, like Macroeconomic Advisers and Moody’s Analytics. And so have Wall Street banks like Goldman Sachs and JPMorgan.

The observers who got it right were the ones who could tell a story that didn’t rely on the early data. Kenneth Rogoff and Carmen Reinhart, who would publish This Time Is Different: Eight Centuries of Financial Folly, their epic history of financial crises, in late 2009, saw that the recovery would be slow and tough. Economists like Paul Krugman and Joseph Stiglitz, who were more knowledgeable about the struggles over recession in Japan and had their own Keynesian understanding of financial panics, were also suitably pessimistic.

But early mistakes can be corrected. If the initial stimulus is too small, you make it bigger. If your housing policies are too modest, you toughen them up. If the private sector sheds jobs and long-term unemployment becomes a problem, you begin hiring workers directly.

Or so goes the theory. The reality is more troubling. The initial stimulus was too small, but there’s no plausible case that Congress would have been willing to make it much bigger just because the Obama administration had a theory that the financial crisis would lead to a worse recession than most forecasters expected. The trouble was that attacking a financial crisis with a too-small stimulus was a bit like attacking pneumonia with too-few antibiotics: you feel better for awhile, and then it comes back. And this time, it’s harder to kill.

The problem is political. Having very publicly passed a very big policy that you promised would revive the economy, the country blames you when the economy does not, in fact, revive. Your policies are discredited and your opponents are emboldened. You lose seats in the next election and your leverage over lawmakers. So you can’t, with any prospect of success, go back to the well and ask for a bigger stimulus or more money to buy up bad mortgages. And then, when the economy gets worse, you’re simultaneously in charge and out of options. You came to Washington promising change and now you’re begging for patience. It’s a crummy situation, and there’s no combination of policy proposals or speeches that can get you out of it. But this is the vise that has tightened around Barack Obama’s presidency.

The combination of stimulus, TARP, and aggressive monetary policy quickly broke the recession. We went from losing 800,000 jobs a month in January 2009 to losing 39,000 jobs a month in January 2010. By March 2010—the same month Obama signed his health care bill into law—we were adding jobs again. It looked like we were on a steady path back to recovery.

Then, in the summer of 2010, the recovery began to wobble. We lost jobs for four months straight. Though employment picked up in the fall and the monthly jobs report never again turned negative, the economy proved unexpectedly stuck at what PIMCO CEO Mohamed el-Erian calls “stall speed”—it’s neither getting worse nor getting much better. Job growth, though positive, has been too slow to cut into the unemployment rate. If it were up to the administration, it would have passed substantially more stimulus as it realized the initial round was much too small. But the Republican Party, which opposed the initial stimulus, has successfully blocked the administration from passing further jobs programs.

It’s possible that if Obama had chosen a different set of advisers, they could have changed the outcome around the margins. The initial stimulus could have focused more on jobs and less on tax cuts, and the President could have emphasized that more would likely be needed. The Obama administration could have moved more quickly to nominate its own director for Fannie Mae and Freddie Mac back when Democrats had sixty seats in the Senate, and that would have given it more freedom to ramp up its housing policy even in the absence of congressional action.

But in general, the fundamental constraints on the administration’s leaders have not been economic or conceptual, but political. They know they need to act. But they can’t act, or at least they can’t act at the scale necessary to really change the economic situation. Republicans won’t let them. Between 2009 and 2011, Senate Republicans launched more filibusters than we had seen in the 1950s, 1960s, and 1970s combined. Democrats had sixty votes for a short period of time, but with Senators Ben Nelson and Joe Lieberman included in that total, they never had easy control of the Senate, whose minority leader, Mitch McConnell, said in October 2010, “The single most important thing we want to achieve is for President Obama to be a one-term president.”

The question, then, is whether the administration could have done more to plan for its inevitable political weakness when it was at the height of its powers. One oft-promoted possibility would have been to abandon health care reform and focus solely on jobs. But it’s not clear what, exactly, that would have meant doing. Health care reform took up most of 2009. The stimulus didn’t really begin spending its money until 2010, and the recovery didn’t flag until later that year.

There is little reason to believe that in 2009, before the stimulus had actually begun doing its work, the Obama administration could have gone back to Congress asking for more. And if the White House, which commanded the largest Democratic majority since the 1970s, had spent the year sitting on its hands waiting to see how the stimulus turned out rather than taking on health care reform or energy or financial regulation, its base would never have forgiven it.

Another option would have been to mount a frontal assault on the filibuster, much as John F. Kennedy’s administration began by launching a frontal assault on the House Rules Committee, which was bottling up civil rights legislation.

I don’t consider this plausible. For one thing, the White House understandably wanted to use its political capital on policies that would be understandable and tangible to Americans rather than on a divisive set of procedural reforms. For another, it would have been very difficult for a candidate who had come to power promising a new era of postpartisanship to begin his presidency by ripping minority protections out of the United States Senate. And finally, there is no evidence that Democratic senators, many of whom quite like the power that the filibuster gives them, would have gone along with the plan.

But if the White House couldn’t go through Congress, perhaps it could have done a better job going around it. A major omission in Suskind’s book—which is also a major omission in political punditry more generally—is that it makes little mention of the Federal Reserve. But the Fed is arguably more powerful than Congress when it comes to setting economic policy, and it is certainly more powerful than the president.

The White House made two major mistakes here. One was leaving two seats on the Fed’s Board of Governors unfilled. Congress certainly deserves some of the blame for this—Senate Republicans filibustered Peter Diamond, a Nobel laureate economist whom the Obama administration nominated to fill one of the open slots—but the truth is that the White House was slow to nominate Diamond, passive once it did nominate him, and seemingly lost once his nomination failed. At the moment, the two seats on the Fed’s Board of Governors remain open, and the White House has not put forward any new candidates. Those seats matter because the Federal Reserve is a cautious institution that is more comfortable fighting inflation than pursuing full employment, and if you want it to act with more vigor, you need to bring that energy in from the outside.

Of course, the most straightforward path to energizing the Fed isn’t adding two new members to its Board of Governors, but replacing its chairman. And the White House had an opportunity to do so in 2010, when Ben Bernanke’s term expired. Instead, Obama chose to renominate Bernanke. The thinking was that Bernanke had pursued an extraordinary set of activist policies during the worst of the crisis—he probably deserves more credit than any single person for preventing a second Great Depression—and he was respected in the institution and by the markets. Reappointing him would thus help with confidence and ensure that the White House had an able partner if the economy turned south again.

But Bernanke has been much more cautious in accelerating the recovery than he was in combating the initial crisis. When the financial markets were collapsing, he went far beyond the traditional limits of the Fed to support the financial markets, purchase depressed assets, and inject liquidity directly into the banking system. But he has not been nearly as aggressive in his efforts to support the recovery. The second round of quantitative easing could have been much bigger. The Fed’s commitment to employment—even at the cost of modest inflation—could have been communicated directly to the markets. Unorthodox policies, such as targeting a specific level of nominal GDP growth, have been left untried.

At this point, even quite mainstream voices have come to worry over Bernanke’s apparent timidity. In September, Charles Evans, the president of the Chicago Federal Reserve, gave a pointed speech in which he asked:

Imagine that inflation was running at 5 percent against our inflation objective of 2 percent. Is there a doubt that any central banker worth their salt would be reacting strongly to fight this high inflation rate? No, there isn’t any doubt. They would be acting as if their hair was on fire. We should be similarly energized about improving conditions in the labor market.

This raises the question of whether the Obama administration made a mistake in reappointing Bernanke. If it had managed to install a more activist chairman at the Federal Reserve, then its inaction might have been more effectively offset by the Fed’s actions.

As it is, both major channels for economic change are clogged, and there appears to be little immediate hope of unblocking them. The president is but one actor in the drama of American politics, and he is quite constrained in his capacity to make—or remake—American policy.

The mass media rarely mentions that, but nor do most presidents. Indeed, the greatest confidence man of the last few years, at least going by Suskind’s definition, was not Larry Summers or Timothy Geithner, but Barack Obama. Being a confidence man is almost in the job description of the insurgent presidential candidate. Having not been president before, you must, by definition, ask the American people for a trust you have not earned.

And Obama was better at this than most. He gave America hope. He made America believe he could deliver change. And, by the standards of Washington, he has probably done more than anyone could rightly have expected. Stimulus, health care reform, the end of “don’t ask, don’t tell,” the creation of the Consumer Financial Protection Bureau, the Lily Ledbetter Fair Pay Act, the payroll tax cut, new tobacco regulation—this is much more than your average first-term president achieves. But by the standards of the speeches and spirit that animated Obama’s campaign, he has not done nearly enough.

At the end of the book, Suskind is sitting in the White House with Obama. “Leadership in this office is not a matter of you being confident,” the President reflects. “Leadership in this office is a matter of helping the American people feel confident.”

But the president needs to do more than lead. He needs to govern. And when he has so convinced the American people of his leadership that their expectations for his term far exceed his—or anyone’s—capacity to govern, disappointment results. That’s when they go looking for another confidence man—one whose promises aren’t sullied by the compromises and concession made in the effort to deliver results—and the cycle begins anew.